Will Mexico Choose Oil Over Clean Energy?

On Tuesday, just days after president Andrés Manuel López Obrador took office in Mexico, the Mexican government announced that it would be suspending a scheduled auction of long-term, clean-energy contracts. The new administration under leftist president López Obrador, who won the presidency in a landslide election back in July, will keep the auction on hold until they have had time to thoroughly review the plan. López Obrador has vowed since the campaign trail that the Mexican government will be much more involved in the nation’s economy for the duration of his tenure.

Flagging oil output has been a persisting problem for Mexico, as its mature fields are in severe decline. More than 70 percent of Mexico’s crude oil comes from just 24 areas, all of which will be depleted over the next decade according to experts. In response, the new president has announced that he will be investing heavily in exploration during his time in office, focusing on developing and exploring onshore and shallow water areas under the control of Pemex to boost the country’s oil production. In fact, in September, nearly two months before he took office, López Obrador announced that he was planning to pour 75 billion pesos ($3.9 billion USD) of next year’s budget into oil extraction.

López Obrador has long been a very vocal skeptic of the previous administration’s decision to open the energy industry to private investors and the international market under outgoing right-wing president Enrique Peña Nieto. Part of the new president’s big plans for the nation’s struggling oil economy is heavy investment in state-owned Petroleos Mexicanos (Pemex) as well as state-owned electric utility Comisión Federal de Electricidad (CFE).

The energy auction that is being suspended as of this week would have been the fourth of its kind, in which developers compete for lucrative long-term contracts to supply CFE with clean energy. The first three of these auctions resulted in contracts amounting to approximately 7,000 megawatts produced by primarily wind and solar power, which further planned investment of a whopping $8.6 billion over the next three years. López Obrador says that he will honor all exploration and production contracts that have already been signed but will continue to freeze any upcoming auctions and will unilaterally oppose fracking. Related: Libya Closes All Oil Ports, Expects To Shut-In 150,000 Bpd

The 7,000 megawatts represented by the contracts won in auction, enough energy to power 6.5 million homes, also saw a major decrease in price, from around $42 per megawatt hour at the first auction, held in 2016, to only slightly more than $20 per megawatt hour last year. “The auctions in a way have become an interesting sideshow, just to see how low prices will go,” said Mark Repsher, an expert in energy markets at London’s PA Consulting who works directly with companies in the Mexican power industry.

Some reporting shows, however, that López Obrador’s auction-freezing strategy will only further stifle Mexico’s fledgling crude output, in direct contradiction of his platform of boosting Pemex’s production and revitalizing the Mexican energy industry. It should be said that this projection comes from a transition report put together by the outgoing administration, who openly oppose the politics and policies of leftist López Obrador (and may therefore be taken with a grain of salt). The report shows that if Mexico goes through with the new President’s plan to suspend auctions for the next two years, the country’s crude output will only reach 2.46 million b/d by 2027, not the previously projected 3.07 million b/d. If auctions are cancelled indefinitely, according to the same report, Mexico’s crude output would fall to just 1.75 million b/d by 2030.

In addition to putting the auction on hold López Obrador says that he plans to lower electricity rates, already subsidized for small consumers’ use, by harnessing more of CFE’s potential hydroelectric capacity. In addition, the President will walk back previous plans to phase out the state electrical utility’s aging generation plants, opting to invest in revamping them instead.